What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 212 added, 128 removed, 303 unchanged (53% of the section changed)

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(ii) uncertainties relating to the business operations of the operators of our assets, including those relating to reimbursement by third-party payors, regulatory matters and occupancy levels;

(iii) the ability of any of Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of Omega’s mortgages and impede the ability of Omega to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies;

(iv) our ability to re-lease, otherwise transition, or sell underperforming assets or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets;

(v) the availability and cost of capital to us;

(vi) changes in our credit ratings and the ratings of our debt securities;

(vii) competition in the financing of healthcare facilities;

(viii) the impact of COVID-19 on our business and the business of our operators, including without limitation, the extent and duration of the COVID-19 pandemic, increased costs experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, and the extent to which government support may be available to operators to offset such costs and the conditions related thereto;

(ix) additional regulatory and other changes in the healthcare sector;

(x) changes in the financial position of our operators;

(xi) the effect of economic and market conditions generally and, particularly, in the healthcare industry;

(xii) changes in interest rates;

(xiii) the timing, amount and yield of any additional investments;

(xiv) changes in tax laws and regulations affecting real estate investment trusts (“REITs”);

(xv) the potential impact of changes in the SNF and ALF markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms;

(xvi) our ability to maintain our status as a REIT;

(xvii) the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action;

(iii) the impact of the 2019 novel coronavirus (“COVID-19”) on our business and the business of our operators, including without limitation, the extent and duration of the COVID-19 pandemic, increased costs and decreased occupancy levels experienced by operators of skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”) in connection therewith, and the extent to which continued government support may be available to operators to offset such costs and the conditions related thereto;

(iv) the ability of any of Omega’s operators in bankruptcy to reject unexpired lease obligations, modify the terms of Omega’s mortgages and impede the ability of Omega to collect unpaid rent or interest during the pendency of a bankruptcy proceeding and retain security deposits for the debtor’s obligations, and other costs and uncertainties associated with operator bankruptcies;

(v) our ability to re-lease, otherwise transition, or sell underperforming assets or assets held for sale on a timely basis and on terms that allow us to realize the carrying value of these assets;

(vi) the availability and cost of capital to us;

(vii) changes in our credit ratings and the ratings of our debt securities;

(viii) competition in the financing of healthcare facilities;

(ix) competition in long-term healthcare industry and shifts in the perception of various types of long-term care facilities, including SNFs and ALFs;

(x) additional regulatory and other changes in the healthcare sector;

(xi) changes in the financial position of our operators;

(xii) the effect of economic and market conditions generally and, particularly, in the healthcare industry;

(xiii) changes in interest rates;

(xiv) the timing, amount and yield of any additional investments;

(xv) changes in tax laws and regulations affecting real estate investment trusts (“REITs”);

(xvi) the potential impact of changes in the SNF and ALF markets or local real estate conditions on our ability to dispose of assets held for sale for the anticipated proceeds or on a timely basis, or to redeploy the proceeds therefrom on favorable terms;

(xvii) our ability to maintain our status as a REIT;

(xviii) the effect of other factors affecting our business or the businesses of our operators that are beyond our or their control, including natural disasters, other health crises or pandemics and governmental action;

particularly in the healthcare industry.

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Omega has exclusive control over Omega OP’s day-to-day management pursuant to the Partnership Agreement.

As of March 31, 2020, Omega owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 3% of the Omega OP Units.

As of June 30, 2020, Omega owned approximately 97% of the issued and outstanding units of partnership interest in Omega OP (“Omega OP Units”), and investors owned approximately 3% of the Omega OP Units.

Omega’s consolidated financial statements include the accounts of (i) Omega, (ii) Omega OP, (iii) all direct and indirect wholly owned subsidiaries of Omega and (iv) other entities in which Omega or Omega OP has a majority voting interest and control.

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Omega OP’s net earnings are reduced by the portion of net earnings attributable to the noncontrolling interest.

As of March 31, 2020, our portfolio of real estate investments consisted of 985 healthcare facilities, located in 40 states and the U.K.

As of June 30, 2020, our portfolio of real estate investments consisted of 981 healthcare facilities, located in 40 states and the U.K.

and operated by 69 third-party operators.

Our investment in these facilities, net of impairments and allowances, totaled approximately $9.7 billion at March 31, 2020, with approximately 97% of our real estate investments related to long-term care facilities.

Our portfolio is made up of 778 SNFs, 115 ALFs, 29 specialty facilities, two medical office buildings, fixed rate mortgages on 47 SNFs, two ALFs and four specialty facilities and eight facilities that are held for sale.

At March 31, 2020, we also held other investments of approximately $424.7 million, consisting primarily of secured loans to third-party operators of our facilities and $194.4 million of investments in five unconsolidated joint ventures.

As of March 31, 2020 and December 31, 2019, we do not have any material properties or operators with facilities that are not materially occupied.

While the COVID-19 pandemic did not materially impact our rental revenue for the first quarter and we have collected substantially all of our contractual rents due in April, the pandemic is having a significant impact on our operators.

As of April 30, 2020, our operators reported 4,136 total confirmed cases of COVID-19 in our facilities which includes cases involving employees and residents, including patients known to be positive at the time of admission from a hospital or healthcare center.

The total cases are within 250 facilities as of April 30, 2020, or 25.9%, of our 966 operating facilities as of March 31, 2020.

Our investment in these facilities, net of impairments and allowances, totaled approximately $9.8 billion at June 30, 2020, with approximately 97% of our real estate investments related to healthcare facilities.

Our portfolio is made up of 767 SNFs, 114 ALFs, 28 specialty facilities, two medical office buildings, fixed rate mortgages on 57 SNFs, three ALFs and four specialty facilities and six facilities that are held for sale.

At June 30, 2020, we also held other investments of approximately $434.7 million, consisting primarily of secured loans to third-party operators of our facilities and $195.5 million of investments in five unconsolidated joint ventures.

As of June 30, 2020 and December 31, 2019, we do not have any material properties or operators with facilities that are not materially occupied.

While the COVID-19 pandemic did not materially impact our rental revenue for the first two quarters of 2020 and we have collected substantially all of our contractual rents due during this time and in July 2020, the COVID-19 pandemic continues to have a significant impact on our operators.

As of July 30, 2020, our operators reported 6,133 total confirmed cases of COVID-19 in our facilities which includes cases involving employees and residents, including patients known to be positive at the time of admission from a hospital or healthcare center.

The total cases are within 415 facilities as of July 30, 2020, or 43.3%, of our 959 operating facilities as of June 30, 2020.

The total confirmed cases reported by our operators may not be adjusted downward for recoveries, discharges or deaths, and may be significantly lower than or different from actual cases based on the availability of testing and the lag time involved in testing and reporting, as well as the accuracy of reporting.

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we also undertake no duty to update this information.

We believe many of our operators have incurred significant cost increases as a result of the pandemic, with dramatic increases for facilities with positive cases.

We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment and supplies.

In terms of occupancy levels, we believe many of our operators are experiencing declines, in part due to the elimination of elective hospital procedures, which drive post-acute skilled nursing admissions.

While we cannot at this time estimate the net impact going forward, we believe that government relief measures at the federal and state levels, including expanded Medicaid reimbursements, may offer meaningful support to offset a portion of these cost increases and impacts to our operators.

There are a number of uncertainties we face as we consider the potential impact of COVID-19 on our business, including how long census disruption and elevated COVID-19 costs will last and the extent to which funding support from the federal government and the states will offset these incremental costs.

We also do not know the number of Omega facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases, and CMS has required additional reporting by operators, we may not receive accurate information on the number of cases and may experience a lag in reporting.

We expect to see increased clinical protocols for infection control within facilities and the monitoring of employees, guests and others entering facilities;

Many of our operators have reported incurring significant cost increases as a result of the pandemic, with dramatic increases for facilities with positive cases.

In terms of occupancy levels, many of our operators have reported experiencing declines, in part due to the elimination or suspension of elective hospital procedures, fewer discharges from hospitals to SNFs and higher hospital readmittances from SNFs.

While government relief measures at the federal and state levels, including expanded Medicaid reimbursements, have offered meaningful support to offset a portion of these cost increases and impacts to our SNF operators, we cannot at this time estimate the net impact going forward to these operators, and we cannot estimate the extent to which ALF operators will receive governmental relief.

We also do not know the number of Omega facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases, and the federal government has required additional reporting by operators, we may not receive accurate information on the number of cases, it may be inconsistent across operators, and we may experience a lag in reporting.

We expect that heightened clinical protocols for infection control within facilities, additional testing of employees and residents and the monitoring of employees, guests and others entering facilities will continue for some period;

however, we do not know if future reimbursement rates will be sufficient to cover the increased costs of enhanced infection control and monitoring.

As such, while we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more visibility into the costs our operators will experience and the level of governmental support that will be available to them, as well as the potential support our operators may request from us.

Given this uncertainty, we have taken several steps during and following the first quarter to enhance our capital position as a precautionary measure, including a partial draw on our $1.25 billion revolving credit facility in the amount of $300 million during the first quarter, as well as entering into $400 million (notional amount) of 10-year interest rate swaps at an average swap rate of 0.8675% that expire in 2024, which provides us with some cost certainty for the refinancing of our senior notes maturing in 2023.

We believe our actions to date provide us with additional liquidity and flexibility to weather a potential pronounced and prolonged impact to our business, and as such, we maintained our dividend level of $0.67 per share for the first quarter dividend.

However, we will continue to evaluate any additional steps that may be needed to maintain adequate liquidity.

In addition, we do not know how and when the implementation of new treatments or vaccines will impact our operators and their populations.

As such, while we continue to believe that longer term demographics will drive increasing demand for needs-based skilled nursing care, we expect the uncertainties to our business described above to persist at least for the near term until we can gain more visibility into the costs our operators will experience and for how long, and the level of additional governmental support that will be available to them, as well as the potential support our operators may request from us.

Given this uncertainty, we have taken several steps to enhance our capital position as a precautionary measure, including a partial draw on our $1.25 billion revolving credit facility in the amount of $300 million during the first quarter of 2020 which was subsequently repaid in the second quarter of 2020, as well as entering into $400 million (notional amount) of 10-year interest rate swaps at an average swap rate of 0.8675% that expire in 2024, which provides us with some cost certainty for the refinancing of our senior notes maturing in 2023.

We believe the availability under our credit facility and hedging strategy support our liquidity and provide flexibility to manage the potential impact to our business.

Accordingly, we have maintained our dividend level of $0.67 per share for the first and second quarters of 2020.

We will continue to evaluate any additional steps that may be needed to maintain adequate liquidity.

Omega is a REIT for United States federal income tax purposes, and Omega OP is a pass through entity for United States federal income tax purposes.

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Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”).

We have elected for five of our active subsidiaries to be treated as TRSs.

Three of our TRSs are domestic and are subject to federal, state and local income taxes at the applicable corporate rates and the other two are subject to foreign income taxes.

As of March 31, 2020, one of our TRSs that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of approximately $5.7 million.

We have elected for certain of our active subsidiaries to be treated as TRSs.

Our domestic TRSs are subject to federal, state and local income taxes at the applicable corporate rates.

Our foreign TSRs are subject to foreign income taxes.

As of June 30, 2020, one of our TRSs that is subject to federal, state and local income taxes at the applicable corporate rates had a net operating loss carry-forward of approximately $5.7 million.

Up to 100% of the net operating loss carry-forwards arising in taxable years ending prior to January 1, 2018, may be used to reduce taxable income for any taxable year during the eligible carry-forward period.

Changes made by the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) limited the amount of net operating loss (“NOL”) carry-forward arising in tax years ending subsequent to December 31, 2018, to reduce 80% of taxable income for any taxable year during the eligible carry-forward period.

Our NOL carry-forward was fully reserved as of March 31, 2020, with a valuation allowance due to uncertainties regarding realization.

Our NOL carry-forward was fully reserved as of June 30, 2020, with a valuation allowance due to uncertainties regarding realization.

Under current law, our NOL carryforwards generated up through December 31, 2017 may be carried forward for no more than 20 years, and our net operating loss carryforward generated in our taxable years ended December 31, 2019 and December 31, 2018 may be carried forward indefinitely.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 modified the NOL carryforward rules applicable to certain of the NOL carryforwards possessed by our TRSs.

First, the Act defers the application of 80% of taxable income limitation, which was added to the Code by the 2017 Act, to our TRS’s taxable years ended December 31, 2021, in addition to modifying the computation of the 80% limitation.

However, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) modified the NOL carryback rules and deferred the application for the NOL carry-forward rules.

The CARES Act signed into law on March 27, 2020 modified the NOL carryforward rules applicable to certain of the NOL carryforwards possessed by our TRSs.

First, the CARES Act defers the application of 80% of taxable income limitation, which was added to the Code by the 2017 Act, to our TRSs until their taxable years ended December 31, 2021, in addition to modifying the computation of the 80% limitation.

Additionally, the CARES Act permits the carryback of NOLs generated by our TRSs in 2018, 2019, and 2020 for up to five years to offset taxable income reported in any of those prior tax years and recover income taxes paid in such prior tax years.

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We also do not expect that Omega or any Omega entity, including our TRSs, will realize a material tax benefit as a result of the changes to the provisions of the Code made by the CARES Act.

For the three months ended March 31, 2020 and 2019, we recorded approximately $0.4 million and $0.2 million, respectively, of state and local income tax provisions.

For the three months ended March 31, 2020 and 2019, we recorded approximately $0.6 million and $0.5 million, respectively, of tax provisions for foreign income taxes.

For the three months ended June 30, 2020 and 2019, we recorded approximately $0.2 million and $0.3 million, respectively, of state and local income tax provisions.

For the six months ended June 30, 2020 and 2019, we recorded approximately $0.6 million and $0.4 million, respectively, of state and local income tax provisions.

For the three months ended June 30, 2020 and 2019, we recorded approximately $0.7 million and $0.5 million, respectively, of tax provisions for foreign income taxes.

For the six months ended June 30, 2020 and 2019, we recorded approximately $1.3 million and $1.1 million, respectively, of tax provisions for foreign income taxes.

The expenses were included in income tax expense on our Consolidated Statements of Operations.

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There is the potential that we may be subject directly to healthcare laws and regulations because of the broad nature of some of these regulations, such as the Anti-kickback Statute and False Claims Act, among others.

Additionally, emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, and temporary changes to regulations and reimbursement issued by the current administration in response to the 2019 novel coronavirus (“COVID-19”) pandemic continue to have a significant impact on the operations and financial condition of our operators.

The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, as well as the difference in how the pandemic may impact SNFs as opposed to ALFs, all of which developments and impacts are uncertain and difficult to predict.

Due to the speed with which the situation is developing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.

Additionally, emergency legislation, including the CARES Act enacted on March 27, 2020 and discussed below, and temporary changes to regulations and reimbursement issued by the current administration in response to the COVID-19 pandemic continue to have a significant impact on the operations and financial condition of our operators.

The extent of the COVID-19 pandemic’s effect on our and our operators’ operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, as well as the difference in how the pandemic may impact SNFs in contrast to ALFs, all of which developments and impacts are uncertain and difficult to predict.

Due to the speed with which the situation is changing, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.

The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.

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As federal and state governments continue to focus on healthcare reform initiatives, efforts to reduce costs by government payors will likely continue, which may result in reductions in reimbursement at both the federal and state levels.

Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, accountable care organizations, and bundled payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations.

Additionally, new and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, value-based purchasing and bundled payments, could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations.

Significant limits on the scope of services reimbursed and/or reductions of reimbursement rates could have a material adverse effect on our operators’ results of operations and financial condition, which could adversely affect our operators’ ability to meet their obligations to us.

Reimbursement Changes Related to COVID-19.

Changes Related to COVID-19.

SNFs have continued to be impacted by the Bipartisan Budget Act of 2018, which extended Medicare sequestration and Medicare reimbursement cuts to providers and plans by 2% across the board through 2027.

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As part of the requirements for receiving the temporary FMAP increase, states must cover testing services and treatments for COVID-19 and may not impose deductibles, copayments, coinsurance or other cost sharing charges for any quarter in which the temporary increased FMAP is claimed.

Additionally, the CARES Act allocates $100 billion to a Public Health and Social Services Emergency Fund to “reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining personal protecting equipment, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source.

HHS announced on July 23, 2020 that the public health emergency, which was currently set to expire on July 31, 2020, would be extended until October 31, 2020.

In addition to maintaining the increased FMAP, this extension also allows the temporary Section 1135 waivers, including suspension of the three-day prior hospital stay coverage requirement and the relaxation of telehealth restrictions, to continue.

Additionally, the CARES Act allocates $100 billion to a Public Health and Social Services Emergency Fund to “reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Nursing facility operators participating in Medicare and Medicaid may be eligible to receive compensation for costs incurred in the course of providing medical services, such as those related to obtaining PPE, COVID-19 related testing supplies, and increased staffing or training, provided that such costs are not compensated by another source.

While “lost revenue” is not defined in the CARES Act, it is anticipated that it could include lost revenue due to a decrease in resident census or a change in the margin of services provided to residents.

The secretary of the Department of Health and Human Services has broad authority and discretion to determine payment eligibility and the amount of such payments.

The Secretary of the HHS has broad authority and discretion to determine payment eligibility and the amount of such payments.

Further, Congress appropriated $75 billion for healthcare providers through the Paycheck Protection Program and Health Care Enhancement Act.

HHS is distributing this money through the Provider Relief Fund, and these payments do not need to be repaid.

While we believe that to date, the payouts under the Provider Relief Fund and Public Health and Social Services Emergency Fund have primarily benefited Medicare providers as opposed to Medicaid providers and have provided limited support to senior housing operators, we cannot predict the extent to which any of our operators will receive such funds, and what the financial impact of receiving such funds would be on their operations.

As of June 2020, HHS had announced distributions of congressional relief funds to healthcare providers, including approximately $50 billion to participants in the Medicare program equivalent to 2% of their annual revenue, as well as $15 billion in funding to providers that participate in Medicaid and the Children's Health Insurance Program (up to 2% of their annual revenues) but that had not received funding in the initial rounds.

The ultimate allocation of these distributions to healthcare providers may differ from the methodology initially announced by HHS, in which distributions would be based on prior Medicare reimbursements or historical net patient revenue.

In addition, distributions may be conditioned on and subject to operators meeting certain compliance obligations.

In July 2020, CMS announced that it will devote $5 billion of the Provider Relief Fund authorized by the CARES Act to qualified Medicare-certified long term care facilities to address critical needs in nursing homes, such as the hiring of additional staff, implementing infection control “mentorship” programs with subject matter experts, increased testing, and providing additional technology services to residents who are unable to receive visitors.

This new funding is in addition to the $4.9 billion previously announced to offset revenue losses and assist nursing homes with additional costs related to responding to the COVID-19 public health emergency and the shipments of PPE provided to nursing homes by the Federal Emergency Management Agency.

CMS additionally announced that it will begin requiring, rather than recommending, that all nursing homes in states with a 5% positivity rate or greater test all nursing home staff each week, although no final rule has been promulgated and the requirement may ultimately be modified.

While we believe that to date, the payouts under the Provider Relief Fund and Public Health and Social Services Emergency Fund have primarily benefited Medicare providers, with more limited funding for Medicaid providers and for senior housing operators, we cannot predict the extent to which any of our operators will receive such funds, what the financial impact of receiving such funds would be on their operations, and whether operators will be able to meet the compliance requirements associated with the funds.

The CARES Act additionally provided payroll tax relief for employers allowing them to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020 through the end of the calendar year.

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One of the initiatives is the formation of the Coronavirus Commission for Safety and Quality in Nursing Homes, a special task force created for the purpose of addressing the rising death toll of residents in nursing homes.

The task force will be composed of leading industry experts, doctors and scientists, resident and patient advocates, family members, infection and prevention control specialists, and state and local authorities.

A second announcement was made which advised that the Federal Emergency Management Agency would begin shipping two weeks’ worth of personal protective equipment (“PPE”) to each of the nation’s 15,400 nursing homes, with all nursing homes receiving a total of 14 days’ worth of PPE no later than July 4, 2020.

Quantities shipped will be based on facility staffing levels and PPE usage rates.

The task force is composed of leading industry experts, doctors and scientists, resident and patient advocates, family members, infection and prevention control specialists, and state and local authorities.

A second announcement was made which advised that the Federal Emergency Management Agency would begin shipping two weeks’ worth of PPE to each of the nation’s 15,400 nursing homes, with all nursing homes receiving a total of 14 days’ worth of PPE no later than July 4, 2020.

The current administration additionally released an interim final regulation regarding the requirement for nursing home operators to report COVID-19-related data directly to the Centers for Disease Control and Prevention in addition to CMS.

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An additional announcement was made that CMS will provide states with $81 million from the CARES Act to increase their inspections of nursing homes.

State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law, or prospective changes to the Healthcare Reform Law under the current administration or Congress, may result in significant changes in healthcare spending at the state level.

To ensure effective oversight is achieved, CMS will allocate the CARES Act funding based on performance-based metrics.

On July 10, 2020, CMS announced plans to deploy Quality Improvement Organizations across the U.S.

to provide immediate assistance to nursing homes in the COVID-19 hotspot areas as identified by the White House Coronavirus Task Force.

CMS subsequently announced on July 14, 2020 a large-scale procurement of rapid point-of-care diagnostic testing supplies to be distributed to nursing homes in the COVID-19 hotspots areas.

However, due to the lower sensitivity and specificity of these test devices, not all state public health departments allow for their use, and many have requirements in place for using these tests appropriately.

This initiative is a one-time procurement of devices and tests targeted toward facilitating on-site testing among nursing home residents and staff.

Following initial distribution of testing supplies from CMS, nursing homes will be able to procure additional tests directly from the respective manufacturers.

On June 16, 2020, the U.S.

House of Representatives Select Subcommittee on the Coronavirus Crisis announced the launch of an investigation into the COVID-19 response of nursing homes.

The Select Subcommittee is seeking information from CMS on the enforcement of health and safety regulations during the crisis, data collection, and provision of life-saving supplies.

Additionally, the Select Subcommittee is seeking documents and information from the five largest U.S.

for-profit nursing home operators related to COVID-19 cases and deaths, testing, PPE, staffing levels and pay, legal violations, and efforts to prevent further infections, as well as additional transparency regarding the use of federal funds by nursing homes during the pandemic.

State budgetary concerns, coupled with the implementation of rules under the Healthcare Reform Law, or prospective changes to the Healthcare Reform Law under the current administration or Congress, may result in additional significant changes in healthcare spending at the state level.

Additionally, the need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes resulting from the COVID-19 pandemic.

Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients could adversely affect our operators’ results of operations and financial condition, which in turn could negatively impact us.

Since our operators’ profit margins on Medicaid patients are generally relatively low, more than modest reductions in Medicaid reimbursement or an increase in the percentage of Medicaid patients has in the past and may in the future adversely affect our operators’ results of operations and financial condition, which in turn could can adversely impact us.

In the state of Florida, the average Medicaid reimbursement rate for SNFs decreased 4.5% effective July 1, 2019, resulting from the loss of one-time discretionary funding applied to October 1, 2018 Florida Medicaid reimbursement rates to cover the impact of hold-harmless provisions in the new, price-based Prospective Payment System (“PPS”) enacted by Florida at that time.

However, the net impact of this rate decrease was to revert the average rate approximately to the pre-PPS, cost-based level as of September 30, 2018, which we believe operators can generally address with operational adjustments to maintain coverage levels.

A smaller discretionary increase effective October 1, 2019 will increase the average rate by 0.7%.

A smaller discretionary increase effective October 1, 2019 increased the average rate by 0.7%.

When the transition hold-harmless provisions expire on September 30, 2021, the PPS rates will no longer be dependent on discretionary funding levels.

At March 31, 2020, 14% of our investments were in Florida.

Texas, which represents 10% of our investments as of March 31, 2020, presents a difficult operating environment for SNF operators as a result of lower statewide occupancy levels, as compared to other states, and a Medicaid rate reimbursement that we believe is among the lowest in the United States.

On June 29, 2020, Florida Governor Ron DeSantis signed a $92.2 billion state budget for FY 2020-2021 into law, which includes a total Medicaid rate increase of $105 million for nursing centers.

At June 30, 2020, 14% of our investments were in Florida.

Texas, which represents 9% of our investments as of June 30, 2020, presents a difficult operating environment for SNF operators as a result of lower statewide occupancy levels, as compared to other states, and a Medicaid rate reimbursement that we believe is among the lowest in the United States.

Several of our operators have experienced lower operating margins on their SNFs in Texas, as compared to other states, as a result of the foregoing and labor costs.

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As proposed, MFAR would further regulate and in some cases materially reform, eliminate or prompt the replacement of certain state Medicaid supplemental payment systems and other allowable financing arrangements that currently benefit healthcare providers.

We have operators in two states, Indiana and Texas, that participate in UPL programs and operators in 36 states who received provider tax reimbursements as of March 31, 2020.

We have operators in two states, Indiana and Texas, that participate in UPL programs and operators in 36 states who received provider tax reimbursements as of June 30, 2020.

Based on our analysis of MFAR and discussions with our operators and other industry leaders, we believe MFAR as proposed would eliminate the incremental UPL funds and that most, if not all, states are or will be able to become compliant under the revised provider tax program.

We cannot estimate the ultimate potential impact of MFAR on our facilities in Indiana and Texas at this time, in part as we expect any reductions in revenues may be at least partially offset by expense reductions.

The proposed MFAR is currently in a comment period and may be changed before a final rule is adopted, or may not be adopted at all.

We believe the ultimate potential impact of MFAR on our facilities in Indiana and Texas is uncertain at this time, in part as we expect any reductions in revenues may be at least partially offset by expense reductions.

If ultimately implemented, MFAR could reduce reimbursement to our operators in those states affected by the rule, which could ultimately have a material adverse effect on the financial condition of those operators.

On July 30, 2019, CMS issued a final rule regarding the government fiscal year (“FY”) 2020 Medicare payment rates and quality payment programs for SNFs, with aggregate payments projected to increase by $851 million, or 2.4 percent, for FY 2020 compared to FY 2019.

On July 31, 2020, CMS issued a final rule regarding the government fiscal year (“FY”) 2021 Medicare payment rates and quality payment programs for SNFs, with aggregate payments projected to increase by $750 million, or 2.2%, for FY 2021 compared to FY 2020.

This estimated reimbursement increase is attributable to a 2.2% market basket increase factor with a 0.0% reduction for the multifactor productivity adjustment mandated by the Improving Medicare Post-Acute Care Transformation Act of 2014 (“IMPACT Act”).

The annual update is reduced by two percentage points for SNFs that fail to submit required quality data to CMS under the SNF Quality Reporting Program (“QRP”).

The CMS also adopted two new quality measures in FY 2020 to assess whether certain health information is provided by the SNF at the time of transfer or discharge.

The two measures are:

1) Transfer of Health Information to the Provider-Post-Acute Care and 2) Transfer of Health Information to the Patient-Post-Acute Care.

The final rule also adopted revised geographic delineations provided by the Office of Management and Budget to identify a provider’s status as an urban or rural facility and to calculate the wage index.

The CMS applied a five percent cap on any decreases in a provider’s wage index from FY 2020 to FY 2021.

Payments to providers are being increasingly tied to quality and efficiency.

The Patient Driven Payment Model (“PDPM”), which was designed by CMS to improve the incentives to treat the needs of the whole patient, rather than the volume of services the patient receives, became effective October 1, 2019 (FY 2020).

The PDPM replaces the previous SNF prospective payment system that utilized the Resource Utilization Group IV case-mix methodology to classify SNF patients based on the volume of services received with a methodology that utilizes the International Statistical Classification of Diseases and Related Health Problems (“ ICD-10”) to classify SNF patients into certain payment groups based on their clinical disease state.

Effective October 1, 2019, group therapy is defined as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

The PDPM replaces the previous SNF prospective payment system that utilized the Resource Utilization Group IV case-mix methodology to classify SNF patients based on the volume of services received with a methodology that instead utilizes the International Statistical Classification of Diseases and Related Health Problems (“ ICD-10”) to classify SNF patients into certain payment groups based on their clinical disease state.

In response to industry stakeholder comments, the CMS finalized changes to the ICD-10 code mappings as part of the FY 2021 SNF prospective payment system final rule, effective October 1, 2020.

Beginning October 1, 2019, group therapy is defined as a qualified rehabilitation therapist or therapy assistant treating two to six patients at the same time who are performing the same or similar activities.

Also effective October 1, 2019, CMS established a 25% cap for concurrent and group therapy.

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The former cap amounts were retained as a threshold above which claims must include confirmation that services are medically necessary as justified by appropriate documentation in the medical record.

While certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some have reported some early positive results, it is too early to assess the long-term impact of the PDPM.

Given the current and ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits.

Prior to COVID-19, we believed that certain of our operators could realize efficiencies and cost savings from increased concurrent and group therapy under PDPM and some had reported early positive results.

Given the ongoing impacts of COVID-19, many operators are and may continue to be restricted from pursuing concurrent and group therapy and unable to realize these benefits.

Additionally, our operators continue to adapt to the reimbursement changes and other payment reforms resulting from the value-based purchasing programs applicable to SNFs under the 2014 Protecting Access to Medicare Act, which became effective on October 1, 2018.

These reimbursement changes could have an adverse effect on our operators’ financial condition and operations, adversely impacting their ability to meet their obligations to us.

These reimbursement changes have had and may in the future have an adverse effect on the operations and financial condition of some operators and could adversely impact the ability of operators to meet their obligations to us.

Quality of Care Initiatives .

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Recent updates to the Nursing Home Care website and the Five Star Quality Rating System include revisions to the inspection process and the implementation of new quality measures.

However, as a result of the COVID-19 pandemic, CMS made changes to, or temporarily suspended the collection and reporting of, certain survey inspection, staffing levels and quality measures, which impacted the information posted on the Nursing Home Compare website and used in the Five Star Quality Rating System calculation.

It is possible that these rating changes or any other ranking system could lead to future reimbursement policies that reward or penalize facilities on the basis of the reported quality of care parameters.

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The DOJ’s civil division has historically used the False Claims Act to pursue nursing homes that bill the federal government for services not rendered or care that is grossly substandard.

In March 2020, the DOJ launched a National Nursing Home Initiative to coordinate and enhance civil and criminal enforcement actions against nursing homes with grossly substandard deficiencies such as poor hygiene, lax infection controls, and inadequate nurse staffing levels.

On June 1, 2020, the CMS announced the imposition of civil monetary penalties for nursing homes with persistent infection control violations and increased enforcement actions for nursing homes with lower level infection control deficiencies.

Medicare and Medicaid Program Audits.

Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, may conduct audits of our operators’ billing practices.

Under the Recovery Audit Contractor (“RAC”) program, CMS contracts with RACs on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program.

CMS also employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments.

In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities.

Should any of our operators be found out of compliance with any of these laws, regulations or programs, our business, financial position and results of operations could be negatively impacted.

Governmental agencies and their agents, such as the Medicare Administrative Contractors, fiscal intermediaries and carriers, as well as the OIG, CMS and state Medicaid programs, conduct audits of our operators’ billing practices from time to time.

CMS contracts with Recovery Audit Contractors on a contingency basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program, to managed Medicare plans and in the Medicaid program.

CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments.

In addition, the state Medicaid agencies and other contractors have increased their review activities.

To the extent any of our operators are found out of compliance with any of these laws, regulations or programs, their financial position and results of operations can be adversely impacted, which in turn could adversely impact us.

Fraud and Abuse .

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Although arbitration agreements have been effective in limiting general and professional liabilities for SNF and long term care providers, there have been numerous lawsuits in recent years challenging the validity of arbitration agreements in long term care settings.

Effective November 28, 2016, CMS had instituted a prohibition against the use of pre-dispute arbitration agreements between SNFs and residents, thereby increasing potential liabilities for SNFs and long-term care providers.

On July 16, 2019, CMS lifted the ban on pre-dispute arbitration agreements offered to residents at the time of admission provided that certain requirements are met.

On July 16, 2019, CMS issued a final rule lifting the prohibition on pre-dispute arbitration agreements offered to residents at the time of admission provided that certain requirements are met.

The rule prohibits providers from requiring residents to sign binding arbitration agreements as a condition for receiving care and requires that the agreements specifically grant residents the explicit right to rescind the agreement within thirty calendar days of signing.

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ASU 2016-13 specifically excludes from its scope receivables arising from operating leases accounted for under Topic 842.

We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach.

Upon adoption, we recorded an initial $28.8 million allowance for expected credit losses with a corresponding adjustment to equity.

We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach and we recorded an initial $28.8 million allowance for expected credit losses with a corresponding adjustment to equity.

Transition Impact of Adopting Topic 326

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The following is our discussion of the consolidated results of operations, financial position and liquidity and capital resources, which should be read in conjunction with our unaudited consolidated financial statements and accompanying notes.

Three Months Ended March 31, 2020 and 2019

Three Months Ended June 30, 2020 and 2019

Operating Revenues

Our operating revenues for the three months ended March 31, 2020 totaled $253.0 million, an increase of $29.3 million over the same period in 2019.

Our operating revenues for the three months ended June 30, 2020 totaled $256.4 million, an increase of approximately $31.1 million over the same period in 2019.

The $31.1 million increase was primarily the result of (i) a $7.0 million increase in rental income resulting from the May 17, 2019, merger with MedEquities Realty Trust, Inc.

(the “MedEquities Merger”), $18.1 million of rental income from the October 31, 2019, $735 million acquisition of 60 SNFs (the “Encore Portfolio Acquisition”) and $0.9 million of additional rental income from other facility acquisitions, facilities placed in service, facility transitions and lease amendments in 2019 and 2020, offset by decreases in rental income resulting from facility sales and rent from cash basis operators and (ii) a $1.6 million increase in mortgage income primarily related to mortgages acquired in the MedEquities Merger and new loans or notes and additional funding to existing operators made throughout 2019 and 2020.

These increases were partially offset by a $1.3 million decrease in other investment income primarily related to a deed in lieu transitioned to leased property offset by new loans or notes and additional funding to existing operators made throughout 2019 and 2020.

(the “MedEquities Merger”), $18.1 million of rental income from the October 31, 2019, $735 million acquisition of 60 SNFs (the “Encore Portfolio Acquisition”) and $2.3 million of additional rental income from other facility acquisitions, facilities placed in service, facility transitions and lease amendments in 2019 and 2020, offset by decreases in rental income resulting from facility sales and rent from cash basis operators, (ii) a $2.8 million increase in mortgage income primarily related to mortgages acquired in the MedEquities Merger and new loans or notes and additional funding to existing operators made throughout 2019 and 2020 and (iii) a $1.8 million increase in miscellaneous income which is primarily related to an operator’s late fees.

Operating Expenses

Operating expenses for the three months ended March 31, 2020 totaled $107.1 million, an increase of approximately $5.6 million over the same period in 2019.

Operating expenses for the three months ended June 30, 2020 totaled $112.7 million, an increase of approximately $14.2 million over the same period in 2019.

The $14.2 million increase was primarily due to:

(i) a $11.8 million increase in depreciation expense primarily resulting from facilities acquired in the MedEquities Merger, the Encore Portfolio Acquisition and other facility acquisitions, (ii) a $3.6 million increase in impairment on real estate properties related to three facilities to reduce their book values to their estimated fair value less costs to sell or fair value and (ii) a $1.5 million increase related to our provision for credit losses.

These increases were partially offset by (i) a $3.2 million decrease in acquisition and merger related costs from the MedEquities Merger and (ii) a $7.7 million decrease in impairments on our direct financing leases.

(i) a $9.9 million increase in depreciation expense primarily resulting from facilities acquired in the MedEquities Merger, the Encore Portfolio Acquisition and other facility acquisitions and (ii) a $6.3 million increase in impairment on real estate properties related to ten facilities to reduce their book values to their estimated fair value less costs to sell or fair value.

These increases were partially offset by (i) a $1.0 million decrease in acquisition and merger related costs from the MedEquities Merger and (ii) a $0.8 million recovery related to our direct financing leases upon final liquidation of the Orianna Health Systems Distribution Trust.

Other Income (Expense)

For the three months ended March 31, 2020, total other expenses were $56.0 million, an increase of approximately $6.0 million over the same period in 2019.

The increase was due to a (i) $4.6 million increase in interest expense primarily related to increased debt balances resulting from our investments during 2019, which includes the HUD debt assumed in the fourth quarter of 2019 and (ii) a $1.1 million increase in interest income and other - net primarily related to the change in the fair value of warrants to acquire shares of another public company.

For the three months ended June 30, 2020, total other expenses were $55.1 million, an increase of approximately $4.1 million over the same period in 2019.

The increase was mainly due to a $4.4 million increase in interest expense primarily related to increased debt balances resulting from our investments made during 2019, which includes the HUD debt assumed in the fourth quarter of 2019 from the Encore Portfolio Acquisition, partially offset by a $0.3 million increase in interest income and other - net primarily related to the change in the fair value of warrants we hold to potentially acquire shares of another public company.

Six Months Ended June 30, 2020 and 2019

Operating Revenues

Our operating revenues for the six months ended June 30, 2020 totaled $509.4 million, an increase of approximately $60.5 million over the same period in 2019.

The $60.5 million increase was primarily the result of (i) a $17.8 million increase in rental income resulting from, the MedEquities Merger on May 17, 2019, $36.3 million of rental income from the Encore Portfolio Acquisition on October 31, 2019 and $21.4 million of additional rental income from other facility acquisitions, facilities placed in service, facility transitions and lease amendments in 2019 and 2020, offset by decreases in rental income resulting from facility sales and rent from cash basis operators, (ii) a $4.4 million increase in mortgage income primarily related to mortgages acquired in the MedEquities Merger and new loans or notes and additional funding to existing operators made throughout 2019 and 2020 and (iii) a $1.5 million increase in miscellaneous income which is primarily related to an operator’s late fees.

Operating Expenses

Operating expenses for the six months ended June 30, 2020 totaled $219.8 million, an increase of approximately $19.8 million over the same period in 2019.

The $19.8 million increase was primarily due to:

(i) a $21.7 million increase in depreciation expense primarily resulting from facilities acquired in the MedEquities Merger, the Encore Portfolio Acquisition and other facility acquisitions, (ii) a $9.9 million increase in impairment on real estate properties related to 13 facilities to reduce their book values to their estimated fair value less costs to sell or fair value and (iii) a $1.5 million increase related to our provision for credit losses.

These increases were partially offset by (i) a $8.5 million decrease in impairments on our direct financing leases and (ii) a $4.2 million decrease in acquisition and merger related costs from the MedEquities Merger.

Other Income (Expense)

For the six months ended June 30, 2020, total other expenses were $111.1 million, an increase of approximately $10.1 million over the same period in 2019.

The increase was due to a (i) $9.1 million increase in interest expense primarily related to increased debt balances resulting from our investments made during 2019, which includes the HUD debt assumed in the fourth quarter of 2019 from the Encore Portfolio Acquisition and (ii) a $0.7 million increase in interest income and other - net primarily related to the change in the fair value of warrants we hold to potentially acquire shares of another public company.

National Association of Real Estate Investment Trusts Funds From Operations

Our funds from operations (“Nareit FFO”) for the three months ended March 31, 2020 was $181.0 million compared to $144.1 million for the same period in 2019.

Our funds from operations (“Nareit FFO”) for the three months ended June 30, 2020 was $186.5 million compared to $157.2 million for the same period in 2019.

Our Nareit FFO for the six months ended June 30, 2020 was $367.5 million compared to $301.3 million for the same period in 2019.

We calculate and report Nareit FFO in accordance with the definition of Funds from Operations and interpretive guidelines issued by the National Association of Real Estate Investment Trusts (“Nareit”), and, consequently, Nareit FFO is defined as net income (computed in accordance with GAAP), adjusted for the effects of asset dispositions and certain non-cash items, primarily depreciation and amortization and impairment on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures and changes in the fair value of warrants.

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Investors and potential investors in our securities should not rely on this measure as a substitute for any GAAP measure, including net income.

The following table presents our Nareit FFO results for the three months ended March 31, 2020 and 2019:

The following table presents our Nareit FFO results for the three and six months ended June 30, 2020 and 2019:

Three Months Ended

Six Months Ended

(in thousands)

Deduct gain from real estate dispositions

(Deduct gain) add back loss from real estate dispositions

Deduct gain from real estate dispositions - unconsolidated joint ventures

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Portfolio and Recent Developments

The following tables summarize the significant asset acquisitions that occurred during the first three months of 2020:

The following tables summarize the significant asset acquisitions that occurred during the first six months of 2020:

Building & Site

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Cash Yield (1)

(1) The cash yield is based on the purchase price.

(1) The initial annual cash yield reflects the initial cash rent divided by the purchase price.

On May 1, 2020, we amended our initial $415 million amortizing master mortgage (the “Master Mortgage”) with Ciena Healthcare (“Ciena”) to (i) increase the interest rate on the Master Mortgage to 10.67% per annum and (ii) add an additional $83.5 million mortgage note related to eight SNFs and one ALF located in Michigan.

These nine facilities were formerly leased to Ciena and were sold to Ciena in a noncash transaction that closed on May 1, 2020 and we retained the first mortgage.

In connection with this sale, we recorded a loss of $3.6 million related to the write-off of the nine facilities’ straight-line rent receivable.

The mortgage note matures on June 30, 2029 and bears an initial annual interest rate of 10.31% which increases each year by 2%.

As of June 30, 2020, the outstanding principal balance of this mortgage note is approximately $83.4 million.

In June 2020, we entered into a loan agreement with subsidiaries of Ciena to provide $43.2 million of mortgage notes related to two SNFs located in Ohio.

The mortgage notes mature on June 30, 2021 and bear an initial annual interest rate of 9.5%.

As of June 30, 2020, the outstanding principal balance of these mortgage notes is approximately $43.2 million.

As of June 30, 2020, our total outstanding mortgages notes receivable with Ciena total $665.4 million.

On April 17, 2020, we provided a $17.6 million unsecured loan to a subsidiary of Second Spring Healthcare Investments (an entity in which we have an approximate 15% ownership interest).

The loan bears interest at the greater of the prime interest rate or 3-month LIBOR plus 2.75% per annum and is due on demand.

As of June 30, 2020, the loan bears interest at 3.25% per annum and has a total outstanding balance of $17.6 million.

Other Recent Development

During the third quarter of 2020, we amended our master lease with Maplewood Real Estate Holdings, LLC (“Maplewood”), an operator of primarily senior housing facilities, and provided a new credit facility to Maplewood.

The new credit facility expanded Maplewood’s borrowing capacity by approximately $100 million to $220 million, in part to provide Maplewood additional liquidity in view of expected ongoing delays and costs associated with COVID-19.

Maplewood refinanced existing notes and certain other funded obligations to us of approximately $120 million in aggregate via borrowings from the new credit facility.

Asset Held for Sale

As of March 31, 2020, we have eight facilities, totaling $24.1 million classified as assets held for sale.

As of June 30, 2020, we have six facilities, totaling $70.5 million classified as assets held for sale.

We expect to sell these facilities over the next twelve months.

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During the first quarter of 2020, we sold six facilities subject to operating leases for approximately $18.1 million in net cash proceeds recognizing a net gain of approximately $1.8 million.

During the second quarter of 2020, we sold 15 facilities subject to operating leases and one facility subject to a direct financing lease for approximately $38.0 million in net cash proceeds recognizing a net gain of approximately $12.8 million.

During the first quarter of 2020, we recorded impairments on real estate properties of approximately $3.6 million on three facilities.

During the second quarter of 2020, we recorded impairments on real estate properties of approximately $12.0 million on 10 facilities.

Our recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators.

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To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or non-binding offers from unrelated third parties and/or broker quotes (a Level 3 input).

On May 26, 2020, we executed an Agreement of Purchase and Sale to sell an acute care hospital located in Nevada to an unrelated third-party for $56.5 million.

Pursuant to the Agreement of Purchase and Sale, the sale remains subject to a 60-day due diligence period which expired in July 2020.

During the second quarter of 2020, we recorded an impairment of approximately $2.2 million (which is included in the $12.0 million above) related to this facility to reduce its net book value to its fair value less costs to sell of approximately $55.3 million and reclassified the facility to assets held for sale.

In July of 2020, we agreed with the third-party buyer to lower the purchase price to approximately $49.0 million.

The reduction in the purchase price will result in an additional impairment and/or loss on sale of approximately $7.4 million during the third quarter of 2020.

Contractual Receivables and Other Receivables and Lease Inducements

As of March 31, 2020, we have approximately $27.4 million of contractual receivables outstanding.

Of the $27.4 million of contractual receivables outstanding, approximately $18.2 million relates to Agemo Holdings LLC (“Agemo,” an entity formed in May 2018 to silo the leases and loans formerly held by Signature Healthcare).

In addition to the contractual receivables, we have approximately $57.7 million of straight-line rent receivables and/or lease inducements associated with Agemo as of March 31, 2020.

As of June 30, 2020, we have approximately $27.6 million of contractual receivables outstanding.

Of the $27.6 million of contractual receivables outstanding, approximately $18.2 million relates to Agemo Holdings LLC (“Agemo,” an entity formed in May 2018 to silo our leases and loans formerly held by Signature Healthcare).

In addition to the contractual receivables, we have approximately $60.0 million of straight-line rent receivables and/or lease inducements associated with Agemo as of June 30, 2020.

In May 2018, we reached an out-of-court restructuring agreement with Agemo that provided for the deferral of rent, the extension of the maturity of our lease and loans, and a working capital loan.

If Agemo’s operations deteriorate and they are unable to meet their contractual obligations to us, we may be required to account for rental income from them on a cash basis and reserve approximately $78.2 million of contractual receivables, straight-line rent receivables and lease inducements.

For the three months ended March 31, 2020 and 2019, we recorded rental income of approximately $15.3 million and $14.8 million, respectively, and other investment income of $1.2 million and $1.0 million, respectively, from Agemo.

For the three months ended June 30, 2020 and 2019, we recorded rental income of approximately $14.8 million and $15.6 million, respectively, and other investment income of $1.3 million and $1.1 million, respectively, from Agemo.

For the six months ended June 30, 2020 and 2019, we recorded rental income of approximately $30.1 million and $30.3 million, respectively, and other investment income of $2.5 million and $2.1 million, respectively, from Agemo.

In addition, we have accounted for Daybreak Venture LLC (“Daybreak”) on a cash basis of accounting since 2017.

See “Daybreak” below.

We have written-off our contractual rents receivable, straight-line rents receivable and lease inducements, and therefore, we have no net receivables or inducements related to Daybreak as of March 31, 2020.

For the three months ended March 31, 2020, we did not record any rental income from Daybreak.

For the three months ended March 31, 2019, we recorded rental income of $5.4 million from Daybreak.

Daybreak did not pay any rent to us during the first quarter of 2020.

Additionally, we recorded impairments of approximately $1.7 million on two Daybreak facilities that we expect to sell in 2020.

We transitioned five Daybreak facilities to existing operators and two additional facilities transitioned from Daybreak to one of those existing operators in the second quarter of 2020.

We have previously written-off our contractual rents receivable, straight-line rents receivable and lease inducements, and therefore, we have no net receivables or inducements related to Daybreak as of June 30, 2020.

For the three and six months ended June 30, 2020, we did not record any rental income from Daybreak.

For the three and six months ended June 30, 2019, we recorded rental income of approximately $5.8 million and $11.1 million, respectively, from Daybreak.

In July of 2020, we executed a Forbearance and Transition Agreement with Daybreak which, among other things, sets forth the parties’ plan to sell or re-lease the Daybreak portfolio, which plan contemplates the potential sale of 28 facilities currently leased to Daybreak to a non-Omega party for $100 million, and the Company’s agreement to forbear from exercising certain default remedies during the transition period.

Consistent with the terms of the Forbearance and Transition Agreement with Daybreak, we have transitioned seven Daybreak facilities to existing operators during the first half of 2020 and one additional facility transitioned from Daybreak to an existing operator in July 2020.

During the fourth quarter of 2019, we transitioned two Daybreak facilities to an existing operator.

The total annual contractual rent from the nine transferred facilities is approximately $4.0 million.

Over the next several quarters, we intend to selectively downsize Daybreak’s portfolio through sales or releasing.

Accordingly, we are in ongoing discussions with several other Texas-based operators about selling and/or leasing several of the facilities.

The total annual contractual rent from the 10 transitioned facilities is approximately $4.3 million.

In addition, we expect to transition an additional eight facilities to a new operator and/or existing operator during the third and fourth quarters of 2020 and expect annual contractual rent on these facilities of approximately $2.0 million.

During the first six months of 2020, Daybreak did not pay rent to us and we recorded impairments of approximately $11.0 million on nine Daybreak facilities that we plan to sell.

As of June 30, 2020, the 28 facilities contemplated to be sold under the Forbearance and Transition Agreement have a net book value of approximately $147 million.

As of August 7, 2020, we have not entered into a definitive agreement for the sale of these facilities.

We evaluated the facilities for impairment as of June 30, 2020 and concluded that the facilities were not currently impaired, as we believe our projected probability-weighted cash flows exceeded the current net book value of the 28 facilities.

In projecting the probability-weighted cash flows, we considered the potential sale of the facilities for $100 million and the potential transition of the facilities to other operators to the extent that the sale to the third party does not ultimately close.

As of June 30, 2020, we estimated a lower probability of such contemplated sale due to lack of a definitive sale agreement and evidence of buyer financing.

To the extent that our assessment of the probability of a potential sale increases in the future, we may be required to record an impairment of approximately $47 million on the 28 facilities to reduce the net book value of the 28 facilities to their estimated fair value or fair value less cost to sell and/or record a loss on the sale.

Accordingly, we remain in ongoing discussions with several other Texas-based operators about selling and/or leasing the remaining facilities.

Any such transitions, will of course, be subject to third-party operator due diligence, regulatory approvals, legal documentation and the cooperation of Daybreak.

While the ultimate outcome and timing of this process is difficult to ascertain, we expect to derive rent or rent equivalents of between $15 million to $20 million annually from our Daybreak portfolio following the restructuring.

However, our ability to implement such restructuring and secure the approvals necessary to do so, the timing and impact on Daybreak’s liquidity from each of the expected benefits discussed above should the portfolio restructuring occur, and the ultimate rental income following any potential transition of select Daybreak facilities to other operators, may be less favorable than expected, and there can be no assurance that such benefits or transition will occur.

Should they not occur, we could be required to impair our remaining assets currently leased to Daybreak.

We continue to closely monitor the performance of all of its operators, as well as industry trends and developments generally.

While the ultimate outcome and timing of this process is difficult to ascertain, we continue to believe we will receive Daybreak portfolio rent or rent equivalents of between $15 million to $17 million annually after the restructuring of the portfolio is completed.

However, our ability to complete the restructuring and secure the approvals necessary to do so and the ultimate rental income following any potential transition of select Daybreak facilities to other operators, may be less favorable than expected, and there can be no assurance whether or when such benefits or transition will occur.

If we are unable to complete the restructuring of the Daybreak portfolio on the terms we expect, we could be required to impair our remaining assets currently leased to Daybreak in addition to the potential impairment charge noted above.

We continue to closely monitor the performance of all of our operators, as well as industry trends and developments generally.

Liquidity and Capital Resources

At March 31, 2020, we had total assets of $10.0 billion, total equity of $4.2 billion and debt of $5.6 billion, representing approximately 56.9% of total capitalization.

At June 30, 2020, we had total assets of $9.7 billion, total equity of $4.2 billion and debt of $5.3 billion, representing approximately 55.8% of total capitalization.

Financing Activities and Borrowing Arrangements

Subordinated Debt

In connection with a 2010 acquisition, we assumed five separate $4.0 million subordinated notes bearing interest at 9% per annum that mature on December 21, 2021.

Interest on these notes is due quarterly with the principal balance due at maturity.

These subordinated notes may be prepaid at any time without penalty.

To the extent that the operator of the facilities fails to pay rent when due to us under our existing master lease, we have the right to offset the amounts owed to us against the amounts we owe to the lender under the notes.

In the fourth quarter of 2019, we had recorded a reserve of $6.5 million in connection with the operator’s failure to pay rent, and we began offsetting certain interest and principal amounts payable by us against this reserve.

During the second quarter of 2020, expressly subject to our reservation of rights under the terms of the notes and related agreement, we reversed this reserve, and ceased offsetting amounts against our note payments, as a result of the operator’s payment of all current and past due rent.

$400 Million Forward Starting Swaps

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Certain of our other secured and unsecured borrowings are subject to customary affirmative and negative covenants, including financial covenants.

As of March 31, 2020 and December 31, 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

As of June 30, 2020 and December 31, 2019, we were in compliance with all affirmative and negative covenants, including financial covenants, for our secured and unsecured borrowings.

Omega OP, the guarantor of Parent’s outstanding senior notes, does not directly own any substantive assets other than its interest in non-guarantor subsidiaries.

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Omega has no obligation to repurchase any amount of its common stock, and such repurchases, if any, may be discontinued at any time.

Omega did not repurchase any of its outstanding common stock through March 31, 2020.

Omega did not repurchase any of its outstanding common stock during the six months ended June 30, 2020.

$500 Million Equity Shelf Program

For the three months ended March 31, 2020 and 2019, we issued approximately 49 thousand and 2.2 million, respectively, shares of our common stock at an average price of $37.58 per share and $34.46 per share, respectively, net of issuance costs, generating net proceeds of $1.8 million and $76.5 million, respectively, under our $500 million Equity Shelf Program.

For the three months ended June 30, 2020, no shares were issued under our $500 Million Equity Shelf Program.

For the three months ended June 30, 2019, we issued approximately 0.7 million shares of our common stock at an average price of $35.90 per share, net of issuance costs, generating net proceeds of $26.3 million under our $500 Million Equity Shelf Program.

For the six months ended June 30, 2020 and 2019, we issued approximately 49 thousand and 3.0 million, respectively, shares of our common stock at an average price of $36.18 per share and $34.82 per share, respectively, net of issuance costs, generating net proceeds of $1.8 million and $102.9 million, respectively, under our $500 Million Equity Shelf Program.

Dividend Reinvestment and Common Stock Purchase Plan

On March 23, 2020, we announced that we suspended our Dividend Reinvestment and Common Stock Purchase Plan.

For the three months ended March 31, 2020 and 2019, we issued approximately 90 thousand and 0.9 million, respectively, shares of our common stock at an average price of $41.80 per share and $36.19 per share, respectively, through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $3.7 million and $32.3 million, respectively.

For the three months ended June 30, 2020, no shares were issued under our Dividend Reinvestment and Common Stock Purchase Plan.

For the three months ended June 30, 2019, we issued approximately 0.6 million shares of our common stock at an average price of $37.02 per share through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $21.8 million.

For the six months ended June 30, 2020 and 2019, we issued approximately 90 thousand and 1.5 million, respectively, shares of our common stock at an average price of $41.80 per share and $36.52 per share, respectively, through our Dividend Reinvestment and Common Stock Purchase Plan for gross proceeds of approximately $3.7 million and $54.1 million, respectively.

We have committed to fund the construction of new leased and mortgaged facilities, capital improvements and other commitments.

We expect the funding of these commitments to be completed over the next several years.

Our remaining commitments at March 31, 2020, are outlined in the table below (in thousands):

Our remaining commitments at June 30, 2020, are outlined in the table below (in thousands):

Total commitments

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To the extent that we do not distribute all of our net capital gain or do distribute at least 90%, but less than 100% of our “REIT taxable income” as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates.

For the three months ended March 31, 2020, we paid dividends of approximately $154.6 million, to our common stockholders.

On the 14 th of February 2020, we paid dividends of $0.67 per outstanding common share to common stockholders of record as of last business day of January 2020.

For the three months ended March 31, 2020, Omega OP paid distributions of approximately $7.3 million to holders of Omega OP Units other than Omega.

For the six months ended June 30, 2020, we paid dividends of approximately $307.2 million to our common stockholders.

On the 14 th of February 2020, we paid dividends of $0.67 per outstanding common share to common stockholders of record as of the last business day of January 2020.

On the 15 th of May 2020, we paid dividends of $0.67 per outstanding common share to common stockholders of record as of the last business day of April 2020.

For the six months ended June 30, 2020, Omega OP paid distributions of approximately $11.9 million to holders of Omega OP Units other than Omega.

The Omega OP Unit holders received the same distributions per unit as those paid to the common stockholders of Omega.

15 unchanged sentences

Changes in the capital markets environment may impact the availability of cost-effective capital and affect our plans for acquisition and disposition activity.

Cash, cash equivalents and restricted cash totaled $352.0 million as of March 31, 2020, an increase of $318.6 million as compared to the balance at December 31, 2019.

Cash, cash equivalents and restricted cash totaled $41.5 million as of June 30, 2020, an increase of $8.2 million as compared to the balance at December 31, 2019.

The following is a discussion of changes in cash, cash equivalents and restricted cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows.

Operating Activities – Operating activities generated $139.1 million of net cash flow for the three months ended March 31, 2020, as compared to $110.1 million for the same period in 2019, an increase of $29.0 million, which is primarily due to facility acquisitions and transitions, acquired mortgages and other investments.

Investing Activities – Net cash flow from investing activities was an outflow of $55.2 million for the three months ended March 31, 2020, as compared to an inflow of $72.1 million for the same period in 2019.

The $127.3 million change in cash provided by investing activities related primarily to (i) an $86.7 million decrease in proceeds from sale of direct financing lease and related trust, (ii) a $45.0 million change in other investments – net and (iii) a $13.2 million increase in real estate acquisitions.

Offsetting these changes was primarily a $17.7 million increase in proceeds from the sales of real estate investments.

Financing Activities – Net cash flow from financing activities was an inflow of $235.2 million for the three months ended March 31, 2020, as compared to an outflow of $152.6 million for the same period in 2019.

The $387.7 million change in cash used in financing activities was primarily related to a $514.5 million change in our credit facility borrowings (of which $300 million was drawn as a precautionary measure in connection with COVID-19, as previously disclosed) – net offset by (i) a $74.7 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (ii) a $28.5 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, (iii) an $18.0 million increase in dividends paid and (iv) a $4.1 million change in other long-term borrowings – net.

Operating Activities – Operating activities generated $329.4 million of net cash flow for the six months ended June 30, 2020, as compared to $265.4 million for the same period in 2019, an increase of $64.0 million, which is primarily due to facility acquisitions and transitions, acquired mortgages and other investments.

Investing Activities – Net cash flow from investing activities was an outflow of $96.7 million for the six months ended June 30, 2020, as compared to an outflow of $15.0 million for the same period in 2019.

The $81.7 million change in cash used in investing activities related primarily to (i) an $83.0 million change in mortgages – net, (ii) a $73.8 million decrease in proceeds from sale of direct financing lease and related trust, (iii) a $56.1 million change in other investments – net and (iv) a $19.5 million increase in real estate acquisitions.

Offsetting these changes were:

(i) a $59.6 million outflow of cash to complete the MedEquities Merger in the second quarter of 2019, (ii) a $47.1 million increase in proceeds from the sales of real estate investments, (iii) a $28.3 million decrease in investment in construction in progress and (iv) a $24.5 million acquisition related deposit in the second quarter of 2019.

Financing Activities – Net cash flow from financing activities was an outflow of $224.1 million for the six months ended June 30, 2020, as compared to an outflow of $227.8 million for the same period in 2019.

The $3.7 million change in cash used in financing activities was primarily related to a $194.6 million change in our credit facility borrowings – net offset by (i) a $101.1 million decrease in cash proceeds from the issuance of common stock in 2020, as compared to the same period in 2019, (ii) a $50.4 million decrease in net proceeds from our dividend reinvestment plan in 2020, as compared to the same period in 2019, (iii) a $33.4 million increase in dividends paid and (iv) a $6.0 million change in other long-term borrowings – net.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

During the quarter ended March 31, 2020, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.

During the quarter ended June 30, 2020, there were no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis